A Bay Street sign, the main street in the financial district is seen in Toronto, January 28, 2013.Mark Blinch / Reuters
As popular as ETFs have become, there's not enough room in the marketplace for every fund now available.
So expect to see more of the kind of announcement that BlackRock Canada's iShares division made a couple of months ago. By the end of September or thereabouts, seven of the firm's exchange-traded funds will be terminated. Five are fund-of-fund products in the "portfolio builder" series, and the other two are cover emerging markets (Brazil and the BRIC countries – Brazil, Russia, Indian and China).
The delisting of an ETF is an inconvenience in that you'll need to find a replacement. There may also be tax owing in a non-registered account where the disposition of a fund being eliminated produces a capital gain.
Otherwise, the process means zero drama. National Bank Financial explained in a recent note that investors face no actual risk. In a de-listing, an ETF's underlying assets are sold and the cash goes to investors as a special one-time distribution. "Investors are free to wait until the actual fund closing date and receive the sale proceeds when they are paid, or they can manage the exit from their ETF by selling the shares on the open market," NBF said.
NBF notes that there are close to 600 ETFs now listed on the TSX from 24 providers, with more on the way. Investor demand for ETFs has been rising steadily, so in a sense this proliferation of funds is about meeting demand. The challenge for new entrants is that the market for core ETFs – they track the more widely followed index and have the lowest fees – is already crowded. To compete, new ETF players are introducing higher-cost funds with unproven strategies. Some will inevitably fail to attract sufficient assets and be de-listed down the road.
A simple rule for minimizing the risk that of your ETFs will be delisted is to only invest in funds with a track record of five years and a typical daily trading volume of at least 5,000 to 10,000 shares. An ETF that goes days without registering a trade is obviously struggling to make an impression on investors.
Rob Carrick